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Case Analysis: Indrajit Power Private Limited v/s Union of India

Indrajit Power Private Limited- Petitioner v/s Union of India and Others- Respondent

W.P. (C) 5408/2021
Decided on May 31, 2021, By Delhi High Court

Factual Analysis Of The Case
The company (IPPL) registered itself with the MSTC Portal for the purpose of bidding for coal mines, in the manner set up by law. The company submitted its tender documents and on 13 March 2015 it was declared as the successful bidder for the coal mine named Nerad Malegaon Coal Mine. Union of India I.e., Respondent number 1 and IPPL (the company) entered a CMPDA (Coal Mine Development and Production Agreement) on March 16, 2015. Clause 6 of the CMPDA required the company to furnish performance security and the same clause also mentioned 'appropriation'. A sum of 30,76,56,000 was deposited as BG and the company thereafter received a Vesting order as well as a mining plan.

Later, an amendment was made in the CMPDA elaborating the ´┐Żefficiency parameters" and giving ´┐Żweightage parameters". IPPL wrote to the Nominated Authority on June 21, 2018, requesting a year to open the mine due to anticipated delays. According to the petitioners, instead of considering the request, a show cause notice was issued against them by respondent 1 for not complying with the necessary efficiency parameters. A reply was sent explaining the cause of the delay being the financial burden.

The nominated authority wrote to IPPL April 2019 regarding renewal of the BG and then the BG was renewed for a year. Yet one more request was submitted for the extension of the period of validity. There again the request wasn't considered instead a second show cause was issued against the petitioner during July 2019. Furthermore, the nominated authority, instead of considering the pleading, referred the case to the scrutiny committee for further proceedings.

The respondent No.1/UOI, directed respondent No.5 /Indian Bank to appropriate the BG for an amount of equal to 17percent. IPPL argues that the Division Bench of this court barred the Ministry of Coal from invoking the BG for Rs. 5,23,01,520 in LPA No. 145/2020. The appeal is ongoing.

In compliance with the Court's LPA No. 145/2020 orders, the BG was split into 17% and 83%. This order provides a Rs. 25,53,54,480 BG on December 18, 2020.Yet, another show cause in November 2019 was issued against the company. In December 2019, a reply was sent by IPPL in compliance with clause 10.1 of the CMDPA. The scrutiny committee didn't consider the submissions made by IPPL and passed the impugned order.

Petitioner's Arguments
  1. It was contended that the respondents should be restrained from encashment of the BG as IPPL was entitled to protection on the ground of special equities.
  2. Neither a chance of any notice to IPPL nor a personal hearing was given, therefore it is a conspicuous violation of principles of natural justice. Reliance was placed on Prakash Atlanta JV v. National Roads Authority of India, ILR (2010) 5 Del 38.
  3. Appropriation Notice is also against the terms of agreement between the parties. Clause of the CMDPA talks about rendering extension in achieving milestones in cases of pandemics or civil commotion and in this case, hinderances were created by interested land holders to prevent sale. It was put forth that IPPL had asked Respondent no.1/UOI to help in this matter, but no aid was provided.
  4. It was argued that already the division bench has stayed an earlier Appropriation Notice. And despite that a second appropriation notice was sent.
  5. It was put forth that IPPL has been discriminated against other companies who could not achieve milestones and still no action was taken against them and weren't subject to any penalty.
  6. It was urged that invocation of BG should be restrained as it would cause financial distress to the company as its captive power company was already facing insolvency proceedings.

Respondent's Arguments
  1. It was argued (respondent 1 to 4) that the law in respect of invocation of BG was then well settled and the agreement between the bank and the respondents was an independent of the contract between the parties and the bank, therefore the respondent no. 5/ The bank was obliged once the respondents No. 1 to 4 invoked the BG. Had there been a fraud in the furnishing of the BG or there were special equities that the courts would interfere with the encashment of the BGs.
  2. In respect of the Appropriation Notice dates 17 May 2021, the counsel argued that the period under reference was 2018-19 when there was neither pandemic nor evidence of any civil commotion. Moreover, it was the company's responsibility to acquire the land and the government had no role to play in the acquisition.
  3. As for the discrimination, there was a delay on the part of the state machinery for the grant of clearances, etc. That penalty was not imposed on other companies even after failing to accomplish the milestones.
  4. It was also submitted by the respondents' no. 1 to 4 counsel that the reply of IPPL was duly considered and referred to in the Minutes of the Scrutiny Committee at Page 323 of the e-paper book [annexure P-9]. Therefore, there was no violation of principles of natural justice.
  5. It was submitted that Performance Security was required to be submitted in terms of clause 6.2 and the same provisions governed appropriation and when an appropriation event occurred. Failure to comply with the Efficiency Parameters was liable to be appropriated. Hence, there was no unlawful invocation of the BG.
  6. Counsel of Respondent No.5/Bank submitted that no relief has been claimed against it and the bank would be releasing the amount to the respondents No. 1 to 4.

Question Of Fact:
  1. Whether there was any differential treatment done to IPPL?
  2. Whether IPPL was not given enough opportunity or a notice to present its case before the scrutiny committee leading to the violations of principles of natural justice?
Question Of Law
Whether bank was liable to be made a party as in what way the contract between IPPL and UOI is affecting the contract between bank and UOI regarding the bank guarantee and under what circumstances there can be an injunction to the encashment of the bank guarantee?

Resolution Of Question Of Law (Ratio Decidendi)
  • It is no longer res integra if the agreement between the bank and the beneficiary regarding a BG is separate from the agreement between the beneficiary and the provider of the BG and the two are separate and distinct agreements. The Supreme Court noted in Standard Chartered Bank (supra) case.
  • What is important, therefore, is that the bank guarantee should be in unequivocal terms, unconditional and recite that the amount would be paid without demur or objection and irrespective of any dispute that might have cropped up or might have been pending between the beneficiary under the bank guarantee or the person on whose behalf the guarantee was furnished. The terms of the bank guarantees are, therefore, extremely material. Since the bank guarantee represents an independent contract between the bank and the beneficiary, both the parties would be bound by the terms thereof. The invocation, therefore, will have to be in accordance with the terms of the bank guarantee, or else, the invocation itself would be bad.
  • The two exceptions due to which the BG (bank Guarantee) cannot be appropriated:
    • Fraud, and that too in the case of beneficiary.
    • In the case of special equities, in the form of irretrievable harm or injustice.
  • In the present scenario none of the above two circumstances where there with IPPL, as the terms of the contract were very much clear with clause 10, clearly talking about the appropriation of bank guarantee, and talking about the special equities, IPPL claimed that due to civil commotion and covid-19 pandemic it has to face an unanticipated delay, but there is a clear time gap between the finalizing of the contract to start the production and the covid period, as the appropriation notice refers to the period of 2018-19 and 2019-20, and at that time there was no covid pandemic.

Judgement Of The Case
  • The petition by IPPL was finally dismissed by the Delhi High court and along with that the previous pending appeal of LPA No. 145/2020 was also dismissed, as there was absence of merit and proper material substance in the contentions put forward by IPPL in its appeal, whether the point of differential treatment is concerned, or delay caused by special equities like the pandemic.
  • Also, IPPL has no say in the invocation of bank guarantee up to the extent of appropriation notice as contract of bank guarantee which is between the bank the beneficiary (UOI) is a separate contract from that between IPPL and UOI, which was governed by CMDPA and there was also absence of the two conditions when the encashment of bank guarantee can be restricted.
  • Therefore IPPL cannot compete with the bank by making it one of the respondents, as it has no say in the contract between bank and UOI.

Relavance Of The Case In Context Of Statute
On a deeper understanding of the question of law we come to find the element of DOCTRINE OF PRIVITY OF CONTRACT in the present case. In the Indian Contract Act, 1872 this privity comes from the section 2(d), basically talking about the consideration. The parties in a contract who reciprocate with each other by performing there parts are considered the only ones who have the say in that contract unless otherwise explicitly mentioned in the terms of the contract.

As in the present case, it was said that IPPL has no say in the contract between bank and UOI regarding the bank guarantee as it is an independent contract between UOI and the bank and has nothing to do with IPPL. Written By:

  • Arjun Pandey and
  • Manyata

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